The most important fact about the U.S. stock market is also the easiest to lose sight of: investors are paying exceptionally high prices by historical standards. The companies may be extraordinary. Artificial intelligence may transform the economy. Neither proposition establishes that the shares will deliver attractive returns from today’s starting point.
Our valuation dashboard puts Shiller CAPE at the 98.9th percentile of its historical sample and public-equity market value relative to GDP at a sample record. The modeled equity risk premium sits near the opposite extreme, indicating unusually little expected compensation for taking equity risk under that model’s assumptions. Together, these readings describe a market that requires a great deal to go right. They do not tell us when prices will fall.
That demanding starting price now meets three uncomfortable developments. Central banks in several major economies have resumed raising rates. The S&P 500 remains unusually concentrated in its largest companies. And the AI buildout is making some of those companies more dependent on physical infrastructure, while competition threatens the price they can charge for intelligence. Our concern is that investors are capitalizing an optimistic outcome before the returns on that investment have been established.
Below, we provide you with our main arguments as to why market valuations are in bubble territory along with some cool graphs.